Tariffs on goods from China, Canada, Mexico and other trading partners took effect, with higher rates for most partners beginning Aug. 7. The new levies have boosted government revenue by about $65 billion while overall goods prices are accelerating. Durable reduction in trade deficits would require higher savings or, more likely, lower growth and investment. Monthly trade balances have been volatile as consumers timed purchases ahead of tariff changes, with the deficit widening to 5.5% of GDP ($138 billion) in March and narrowing to 2.4% ($60 billion) in June. The current-account deficit rose to 6% of GDP in the first quarter from 4.2% in the fourth quarter of 2024 and likely declined to about 4.5% in the second quarter. Trade and current-account balances will fluctuate in the short run as the economy adjusts to the new tariff regime.
Some six months after the Trump administration announced its first tariffs on goods from China, Canada and Mexico, it's starting to feel that policy may be starting to stabilize now that higher rates for most of the rest of America's trading partners went into effect Aug. 7. Although it's still too early to confidently predict what the economic impacts of tariffs will be, some are becoming clearer.
And what about the original motivation for implementing tariffs, which was to reduce trade deficits? The only sure way they might durably do so is if they increase savings or, more likely, reduce growth and investment. America's shortfall in trade has swung wildly in recent months, though the volatility is not surprising. Tariff policy has been highly uncertain, and Americans have been timing purchases to get ahead of any extra costs before they take effect.
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